Day of reckoning for commercial real estate in 2012 – largest amount of loans maturing next year as $150 billion in CRE debt comes due. Federal Reserve running out of options in hiding financially disastrous real estate loans.
The Federal Reserve has tried its best to hide the secrets of past banking blunders deep in its balance sheet. Commercial real estate (CRE) loans made in haste during the real estate bubble are part of this national disgrace in banking folly. As the Federal Reserve and U.S. Treasury digitally print the dollar into oblivion the bad CRE loans still linger in the Fed balance sheet. As it turns out the Fed has become the dumping ground for all things real estate and has traded toxic loans for quality liquidity to fuel the banks back up. CRE debt in the form of empty shopping malls, failed hotels, and tumbleweed occupied strip malls is only a flavor of what the Fed is taking on. Yet many of these loans are still occupying the balance sheet of many banks. As it turns out, there was so much junk in the CRE market that the Fed could only balloon their balance sheet and still not encompass one half of the CRE market. Many CRE loans are coming due in 2012. Is the day of reckoning for CRE coming in 2012?
The Federal Reserve’s elaborate financial charade on the American people – Big banks hold excess reserves that represent 10 percent of U.S. GDP. Federal Reserve has failed on largest goals for our economy.
The antics of our Federal Reserve rival those of the now disgraced IMF chief although they won’t grab as many gossip headlines. The Federal Reserve has fashioned a system that has allowed economic bubbles to surface every very few years like high school reunions. Bubbles are not normal. These are financial disequilibrium events that occur simply because excess money is flowing through the system. The housing bubble was the perfect example of what happens when a central bank does not mind its own store. The Federal Reserve, our central bank and supposed expert on all things money, sought to protect the banking system at all costs during this recent crisis. It is amazing how the actions conducted by the Fed were never fully scrutinized in the media thoroughly even though this is where most of the money was funneled. It was simply assumed that the trillions of dollars in loans, purchases, and accounting chicanery that went to the largest banks was somehow the perfect way to avoid a crisis. Who really avoided the crisis here? The working and middle class is still disappearing. Yet the large Wall Street banks are back to their profitable ways since they figured out that the best thing for business is a crisis. These banks (just like the Fed) have little desire to help the American public even though they are only standing because of the power of the people.
Scorching the desert housing markets – Arizona and Nevada real estate blossomed with cheap fuel and easy access to debt. For last two years 40 percent of buyers came from all cash purchases. What happens when the well runs dry in the financial desert?
The Arizona housing market is a perfect example of what happens when the housing religion spirals out of control and implodes in dramatic fashion pushing up against environmental limits. I remember driving in the blistering summer heat through Arizona before all the housing mania launched out of control in the late 1990s and thinking that the only reason the land was hospitable was because of cheap fuel and air conditioning. It costs money to move large amounts of water to an otherwise arid region. You have months of 100 plus degree weather and electric bills that run the size of your mortgage payment. A beautiful state but one based on access to affordable fuel. The housing market has crashed for both Arizona and neighboring Nevada. These areas are no stranger to booms and busts yet this time it is different. The cheap energy model that kept these locations operating is largely coming to an end. These are commuting locations. Have you ever tried walking down the Las Vegas strip during the summer time? You might as well pack two gallons of water and a cowboy hat before making it two blocks. The market has melted in the region like rubber on the bottom of your shoes.
The endgame of the credit card nation – 40 year bull market in revolving debt expansion comes to a sudden halt. U.S. consumers on average have 4 credit cards with 1 out of 7 having 10 or more.
Credit cards are the gateway financial opiate of choice for many spenders. Banks understand that if consumers begin mistaking debt for actual wealth then this would lead to more willingness to borrow on bigger ticket items like cars and homes as the appetite for credit expands. This psychological gamble paid off multiple dividends over the decades as many real income strapped Americans started confusing housing debt, auto loans, and plastic shiny cards in the wallet as some kind of newfound wealth. Access to debt suddenly became a new definition for wealth. No other country has manic usage of debt like the United States. 1 out of 7 Americans carries over 10 credit cards. Another 1 in 7 uses at least half the balance on their credit card. How is it possible to give so much access to debt to a nation where the average per capita income rounds out at $25,000? The misguided notion that deficits do not matter that engulfed the country like a bad fad in the 1970s and 1980s largely set the stage for our current peak debt situation. Credit card debt is now fiercely contracting and the 40 year run is over.